The Bank Loan Approval Process, Explained

If you’ve ever considered or tried getting a bank loan approval, you no doubt already know the value of this question. You’re also a member of a very elite club: the entrepreneurs. Everybody does something for the first time. It happens millions of times a day. It’s happening right now. And it’s making a business better somewhere, right now. If you’re at that stage of business expansion, then it’s time to learn the business loan approval rules the banks use when deciding whether or not to approve a business loan application.

Standard Bank Loan Approval Requirements

1. Company Bank Statements

Bank statements are the most important financial documentation to support a typical bank loan. They tell lenders how well you manage your finances, not just how much revenue you generate. Banks typically ask for the past 3 years of bank statements when considering a loan applicant. Younger businesses who don’t have 3 years’ worth of bank statements can often supplement this requirement with other financials to help paint a representative picture of you as a prospective borrower, which is the entire idea. The bank would then generally suggest an SBA loan for support.

2. The Balance Sheet

This is the foundational financial document that bank lenders may constantly refer to when analyzing your other financials, so it pays to make sure it is accurate and up to date. Also make sure what you submit here covers the last three years.

3. Profit & Loss Statements

P&Ls are basically income statements, sometimes called “revenue statements”. These details net income of the business, demonstrating where the money came from and where it’s going from transaction to transaction.

Profit & loss statements are required documentation in a bank loan application due to the fact that they can show the lender proof of your cash flow and the stability of the business, based on the history of the life of that cash flow.

Usually, lenders will want to see the past three years including the current year-to-date P&L updated to reflect the period preceding the most recent past 3 years. The applies particularly for a small business.

4. Tax Returns: Business & Personal

“Personal income return? Isn’t this about my business?!”

In fact, these are used mostly to judge your financial acumen. It’s rare not to be asked for these, and so if you have a year or so before you plan to take out your loan, that is an ideal opportunity to start getting meticulous. You’ll have one year’s return to demonstrate how serious you take your financial records, and this will go a long way on your bank business loan application. Most bank’s will ask for three years of personal taxes.

5. Your Personal Credit Score

“Hey! This is getting way too personal!”

Be that as it may, again, if applying for a bank loan, risk is highly modulated and a deep look into your personal financial life is essential to a bank’s risk management precautions.

While there are options for individuals with bad credit seeking a business loan for a small business, the terms on such loans are frequently less favorable to the borrower. As a rule of thumb, anything above 700 is doable, and anything lower than 600 is an automatic red flag that may trigger the high-interest rate alert for a bank.

For these reasons, it’s good to know where your credit history stands. Get a complete report before you get too close to loan time for best results. You may have some time to impact the score by the time you plan to take out the loan, and thus merit more favorable loan terms and a lower interest rate.

6. Duration in Business

This is the stress test factor in the loan approval process. Sheer endurance, especially in rough economic times, is the best indicator of stability, especially for a smaller business. Longer-running businesses will obviously fare better with interest rates and bank loan terms because they will get credit for their management acumen.

7. Use of Loan

Seemingly obvious, what may not so obvious is the clarity of mind you will need in defining the use of your loan rationally and pragmatically. Beware of using a business loan, for example, for merely personal use. If a lender sees a previous loan in your financial history as frivolous or personal in nature, it could hurt a newer business when trying to get a second loan in less positive economic times.

Legitimate reasons for a loan can include a plethora of functions, from expansion to meet the projected demand for service/product, to buying equipment, factory space or warehouses, paying for services or short-term payroll to creating a cashflow cushion that your slower-paying customer invoices may not allow.

Other Required Documents

These are not the only documents your lender may require for your loan in cases where credit is not ideal or other factors demand closer scrutiny. In fact, there are many other, far more detailed business records that can go into proving the viability of your business. Many of these are generated by the business without your effort. Some require your commitment.

We’ll cover those additional, non-standard bank loan approval requirements in a future post. For now, it’s enough to say that your loan approval depends upon thorough documentation and complete records that demonstrate how well your business handles finances and resources.

Thanks for providing these details, quite informative and educative. It seems one with a very bad credit score may find it difficult to get a loan approved. But do they investigate further on issues that caused the bad credit score, perhaps not really the person’s fault and any consideration to that effect? Thanks.

As for credit history, yes lenders do look beyond the FICO score into the history sometimes, though not always. Usually, if applying for a loan at a bank, they will get granular into the fine details of your credit situation with you. Some credit card offers may not. That’s why you should always carefully manage and police your own business credit history, as well as your own personal history, to make sure neither is wrongly dragging your credit rating down. That said, getting a loan with bad credit is not impossible and relies on collateral and higher initial rates in most cases, but can also involve invoice factoring RLOCs.

Thanks for providing insights on bank loan approval processes. The last step which is “Use of loan” got me thinking, my business is a start up business but with great potentials. Just wondering if that would lead to my loan application not approved.

Being new with no credit history as a business, its true, can be a drag on loan prospects, but typically VC/crowd-funding and credit card offers with high interest are available. For a bank loan, however, it could get more difficult. We deal with this scenario sometimes for clients and navigate other alternative lender options in these cases, normally. In such cases, collateral and frequent invoice history tend to be crucial, as well as willingness to pay more interest initially until 6-12 mo later when refinancing on the original loan is possible.

This is a great article, Randy! Excellent explanation. Sometimes lenders are concerned at asking the ‘personal’ questions. K-1’s are some of the most important information that has to be asked for twice.